Iceland's strong krona a curse for tourism, fishermen

After 10 hours at sea, Halldor Armmansson surveys the bins of freshly caught cod lining the deck of his boat.

The ocean stocks are plentiful, but Iceland's soaring krona is making it a struggle for fishermen like Armmansson to reel in the financial rewards of a catch.

"We have to fish more to get the same amount of money," explains Armmansson, whose family owned company in Sandgerdi, a small port in southwestern Iceland, has two boats.

Quotas limit the annual catch to 250 tonnes and he expects his company's income to drop by around a third this year: "We can't make the same income when the currency is so strong."

Iceland has bounced back spectacularly from the 2008 financial crisis, which prompted the government to nationalise three failing banks and impose steep restrictions on capital flows in and out of the sparsely populated island nation.

When capital controls were lifted in March, the krona did not fall as much as experts had expected.

Fuelled by investor appetite for the country's high interest rates and robust economy, which grew more than seven percent in 2016, the krona last month hit its highest level in almost a decade and became a source of public disagreement among political leaders.

"It's probably one of the things that worries me the most in the Icelandic economy," says Finance Minister Benedikt Johannesson of the krona's ascent.

- Politicians divided -

In one year, all foreign currencies have lost ground against the krona. Among the biggest losers are the pound sterling, the Swedish krona and the euro, which have shed between 15 and 22 percent.

Exchange rates with the British pound and the euro strongly affect the fishing industry, which sells nearly three-quarters of its products to Europe and accounts for more than 40 percent of the country's exports.

Politicians are at odds about how to deal with the issue.

The krona should be pegged to a strong currency like the euro, Johannesson said in an interview with the Financial Times published Monday.

But Prime Minister Bjarni Benediktsson subsequently told Bloomberg he prefers a variable rate, which could serve as a tool to adapt to financial crises.

Johannesson and Benediktsson are cousins, but members of two different parties -- the centre-right and pro-EU Reform party and the conservative Independence party respectively -- in a coalition government.

Central bank governor Mar Gudmundsson, in an interview with AFP, pointed to a boom in tourism, good terms of trade and record high domestic consumption as contributing to the krona's rise.

With (Other OTC: WWTH - news) a record of nearly two million visitors to the Nordic nation in 2016, tourists wanting to see the island's volcanoes or Aurora Borealis now bring in most of its revenue but are being affected by the strong currency.

"We've registered a 40 percent drop in bookings for July compared to last year," says Antoine, a French travel agent in Reykjavik who only gave his first name.

Jessy Picard, a 31-year-old French tourist, does not plan to buy any souvenirs from his road trip, saying: "We're spending a lot less than we planned."

At the Ranga Hotel, most bookings are paid in foreign currency.

Fridrik Palsson, who manages the luxury hotel on the southern coast, estimates it has lost up to 20 percent in income in less than a year.

Margins have shrunk, with salaries rising around seven to 12 percent, Palsson says.

"Companies are really struggling, because we have to pay our costs in krona."

With wages improving, consumption rose nearly seven percent in 2016.

The strong currency is "good for consumers as we can import goods and get them very cheap", said Thorolfur Matthiasson, an economics professor at Iceland University.

Wages, which are high when measured in dollars or euros, are "comfortable for the wage earners", he says, before lifting a warning finger and adding: "As long as that kind of wage level is sustainable."